S&P downplays draft regulation impact on Chorus credit rating

Standard & Poor's has downplayed the threat of looming price regulation to access Chorus switchgear on its ageing copper lines, saying the final ruling will probably be amended, given the highly political nature of the fibre network.

The Commerce Commission yesterday released a draft determination that would cut what Chorus can charge internet service providers for accessing its unbundled copper network without having to build their own electronics and software to $8.93 per line a month from December 2014 from $21.46.

Chorus has said this will slash as much as 40%, or $160 million a year, from pre-tax earnings, while changes to wholesale pricing for UCLL would have a $20 million earnings impact.

S&P credit analysts Paul Draffin and Anthony Flintoff says the draft pricing decision is based on a very narrow benchmark and will probably be challenged. They say the government's plans to build a national fibre network will also play into the final ruling, with politicians likely to influence it.

"Accordingly, in our view, it is likely that the draft UBA decision will be subject to amendment before it becomes final," the report says.

Chorus has "significant capacity" to accommodate regulated price cuts for its services to keep its investment grade BBB credit rating and expects the company's funds to debt will be well within the rating agency's tolerance.

Rival rating agency Moody's Investors Service put Chorus' rating on notice over the draft decision, saying it would "exacerbate Chorus's negative free cashflow position and lead to materially elevated leverage, putting significant pressure on the company's key financial metrics".

If Chorus' credit rating falls below investment grade while debt is still owed Crown Fibre Holdings for the government-sponsored fibre network build, the network company is banned from paying dividends without CFH's approval.

Prime Minister John Key described the move as "very problematic" and Communications Minister Amy Adams has referred it to her officials to assess the pricing impact, saying a pricing methodology appropriate to New Zealand had to be found.

Among Chorus' concerns is the potential for much lower copper network pricing to deter investment and uptake of ultra-fast broadband using the government-subsidised fibre network being laid throughout the country.

Chorus was spun-out from Telecom as a separately-listed company last year to free up the telecommunications company from its regulatory burden and allow the network operator to successfully win a billion-dollar subsidy to build a nationwide fibre network and rural broadband system.

Some 80% of the network company's revenue is still derived from the ageing copper network and is subject to the Commerce Commission's pricing review.

At a media briefing in Wellington, Telecommunications Commissioner Stephen Gale yesterday stressed the UBA pricing regime was a draft decision and would go out to industry for consultation with a view to making a final ruling in June.

The UCLL service lets telecommunication companies use the copper network between an exchange and an end-user's premises to offer their own voice and broadband services.

UBA gives access to Chorus's electronics, software and transport over the network, meaning telcos don't have to build their own.

If by chance it is eventually the case that copper prices are kept artificially high by the government (as investor) directing or influencing the decisions of the its independent telecommunications regulator ... is that actually a hidden tax on broadband consumption via copper to protect the viability of the government investment? It's just an innocent question!

Let me be clear: I have no problem about promoting fibre uptake. I'd just rather that we also respected the notion of the rule of law as well. Otherwise, we start to look like... <you can fill in this blank yourself>

The CC is just doing what National's own legislation requires it to do. No point crying foul now.
The fact is that copper prices have fallen across the world, and on any cost-based analysis Chorus would see a fall from current prices. The only solution to this is for the government to tax copper lines to make fibre more attractive, or force consumers to switch. In any scenario, the poor old consumer picks up the tab. You might not want fibre but you're damn well going to have because its good for you - oh, and you've got to pay for it to.
All for something that, as yet, delivers no tangible benefit.